UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended August 4, 2006

THE TORO COMPANY

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

The number of shares of Common Stock outstanding as of September 1, 2006 was 40,962,724.

THE TORO COMPANY

INDEX TO FORM 10-Q

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PART I. ITEM 1. FINANCIAL INFORMATION

THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings (Unaudited)

(Dollars and shares in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

See accompanying notes to condensed consolidated financial statements.

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THE TORO COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

August 4, 2006

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. Unless the context indicates otherwise, the terms “company” and “Toro” refer to The Toro Company and its subsidiaries. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting primarily of recurring accruals, considered necessary for a fair presentation of the financial position and results of operations. Since the company’s business is seasonal, operating results for the nine months ended August 4, 2006 cannot be annualized to determine the expected results for the fiscal year ending October 31, 2006. Certain amounts from prior period’s financial statements have been reclassified to conform to this period’s presentation.

The company’s fiscal year ends on October 31, and quarterly results are reported based on three month periods that generally end on the Friday closest to the quarter end. For comparative purposes, however, the company’s second and third quarters always include exactly 13 weeks of results so that the quarter end date for these two quarters is not necessarily the Friday closest to the quarter end.

For further information, refer to the consolidated financial statements and notes included in the company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2005. The policies described in that report are used for preparing quarterly reports.

Accounting Policies

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management must make decisions that impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgments based on its understanding and analysis of the relevant circumstances, historical experience, and actuarial valuations. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared. Note 1 to the consolidated financial statements in the company’s most recent Annual Report on Form 10-K provides a summary of the significant accounting policies followed in the preparation of the financial statements. Other footnotes to the consolidated financial statements in the company’s Annual Report on Form 10-K describe various elements of the financial statements and the assumptions made in determining specific amounts.

Comprehensive Income

Comprehensive income and the components of other comprehensive income were as follows:

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Stock-Based Compensation

The company accounts for stock-based compensation awards in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), “Share-Based Payment.” During the first quarter of fiscal 2006, option awards were granted with an exercise price equal to the market price of the company’s common stock as of the date of grant. For certain non-officer employees, the options vest after two years from the date of grant and have a five-year contractual term. Other options granted during the first quarter of fiscal 2006 vest one-third each year over a three-year period and have a ten-year contractual term. Compensation expense equal to the grant date fair value is recognized for these awards over the vesting period. The company also issues Performance Shares to key employees. The company determines the fair value of these Performance Shares as of the date of grant and recognizes the expense over the vesting period. Total compensation expense for option awards and Performance Shares for the third quarter of fiscal 2006 and 2005 was $1.6 million and $2.5 million, respectively. Year-to-date compensation expense for option awards and Performance Shares through the third quarter of fiscal 2006 and 2005 was $5.6 million and $6.7 million, respectively.

The fair value of each share-based option is estimated on the date of grant using a Black-Scholes valuation method that uses the assumptions noted in the following table. The expected life is a significant assumption as it determines the period for which the risk-free interest rate, volatility, and dividend yield must be applied. The expected life is the average length of time over which the employee groups will exercise their options, which is based on historical experience with similar grants. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Expected volatilities are based on the movement of the company’s stock over the most recent historical period equivalent to the expected life of the option. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate over the expected life at the time of grant. Dividend yield is estimated over the expected life based on the company’s dividend policy, historical dividends paid, expected increase in future cash dividends, and expected increase in the company’s stock price. The following table illustrates the assumptions for options granted in the following fiscal periods.

The weighted-average fair value of options granted during the first quarters of fiscal 2006 and 2005 was $10.90 per share and $11.14 per share, respectively. The fair value of Performance Shares granted during the first quarters of fiscal 2006 and 2005 was $41.44 per share and $37.02 per share, respectively. No options or Performance Shares were granted during the second and third quarters of fiscal 2006 and 2005.

Inventories

Inventories are valued at the lower of cost or net realizable value, with cost determined by the last-in, first-out (LIFO) method for most inventories and first-in, first-out (FIFO) method for all other inventories. The company establishes a reserve for excess, slow-moving, and obsolete inventory that is equal to the difference between the cost and estimated net realizable value for that inventory. These reserves are based on a review and comparison of current inventory levels to the production and sales history of the inventory.

Inventories were as follows:

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Per Share Data

Reconciliations of basic and diluted weighted average shares of common stock outstanding are as follows:

Shares for all periods presented have been adjusted to reflect a two-for-one stock split effective March 28, 2005.

Segment Data

The presentation of segment information reflects the manner in which management organizes segments for making operating decisions and assessing performance. On this basis, the company has determined it has two reportable business segments: Professional and Residential. The Other segment consists of company-owned distributor operations in the United States and corporate activities, including corporate financing activities and elimination of intersegment revenues and expenses.

The following table shows the summarized financial information concerning the company’s reportable segments:

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The following table presents the details of the Other segment operating loss before income taxes:

Goodwill

The changes in the net carrying amount of goodwill for the first nine months of fiscal 2006 were as follows:

Other Intangible Assets

The components of other amortizable intangible assets were as follows:

Amortization expense for intangible assets during the first nine months of fiscal 2006 was $631,000. Estimated amortization expense for the remainder of fiscal 2006 and succeeding fiscal years is as follows: 2006 (remainder), $237,000; 2007, $787,000; 2008, $573,000; 2009, $251,000; 2010, $175,000; 2011, $175,000 and after 2011, $506,000.

The company also has $2.6 million of non-amortizable intangible assets related to the Hayter brand name.

Warranty Guarantees

The company’s products are warranted to ensure customer confidence in design, workmanship, and overall quality. Warranty coverage ranges from a period of six months to seven years, and generally covers parts, labor, and other expenses for non-maintenance repairs, provided operator abuse, improper use, or negligence did not necessitate the repair. An authorized Toro distributor or dealer must perform warranty work. Distributors, dealers, and contractors submit claims for warranty reimbursement and are credited for the cost of repairs, labor, and other expenses as long as the repairs meet prescribed standards. Warranty expense is accrued at the time of sale based on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, and other minor factors. Special warranty reserves are also accrued for major rework campaigns, which is included as a component of Changes in Estimates in the table below. The company also sells additional warranty coverage on select products when the factory warranty period expires.

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Warranty provisions, claims, and changes in estimates for the first nine-month periods in fiscal 2006 and 2005 were as follows:

Postretirement Benefit Plans

The following table presents the components of net periodic benefit costs:

As of August 4, 2006, approximately $438,000 of contributions had been made. The company presently expects to contribute approximately an additional $200,000 to its postretirement health-care benefit plan in the remainder of fiscal 2006.

The company maintains The Toro Company Investment, Savings and Employee Stock Ownership Plan for eligible employees. The company’s expenses under this plan were $3.8 million and $12.1 million for the third quarter and year-to-date periods in fiscal 2006, respectively, and $4.0 million and $11.7 million for the third quarter and year-to-date periods in fiscal 2005, respectively.

Derivative Instruments and Hedging Activities

The company uses derivative instruments to assist in the management of exposure to currency exchange rates. The company uses derivative instruments only to limit underlying exposure to currency fluctuations, and not for trading purposes. The company documents relationships between hedging instruments and the hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The company assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item.

The company enters into foreign currency exchange contracts to hedge the risk from forecasted settlements in local currencies of trade sales and purchases. These contracts are designated as cash flow hedges and are reported at fair value as a hedge asset or liability in prepaid expenses or accrued liabilities, as applicable. Changes in the fair value of these contracts are reported in accumulated other comprehensive loss until the hedged transaction occurs. Once the forecasted transaction has been recognized as a sale or inventory purchase and a related asset or liability recorded in the balance sheet, the related fair value of the derivative hedge contract is reclassified from accumulated other comprehensive income (loss) into earnings. During the three and nine months ended August 4, 2006, the amount of (loss) gains reclassified to earnings for such cash flow hedges was $(0.8) million and $0.2 million, respectively. For the nine months ended August 4, 2006, the gains treated as an addition to net sales for contracts to hedge trade sales were $0.1 million and the gains treated as a reduction of cost of sales for contracts to hedge inventory purchases were $0.1 million. As of August 4, 2006, the notional amount of such contracts outstanding was $71.7 million. The unrecognized after-tax loss portion of the fair value of the contracts recorded in accumulated other comprehensive loss as of August 4, 2006 was $0.1 million.

The company also enters into other foreign currency exchange contracts. These contracts are intended to hedge intercompany financing transactions and other activities and are not designed as hedging instruments under the accounting criteria of SFAS No. 133; therefore, changes in fair value of these instruments are recorded in other income, net.

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Contingencies

On June 3, 2004, eight individuals who claim to have purchased lawnmowers in Illinois and Minnesota filed a lawsuit in Illinois state court against the company and eight other defendants alleging that the horsepower labels on the products the plaintiffs purchased were inaccurate. On May 17, 2006, the plaintiffs’ filed an amended complaint to add 84 additional plaintiffs and an engine manufacturer as an additional defendant. The amended complaint asserts violations of the federal Racketeer Influenced and Corrupt Organizations (RICO) Act and statutory and common law claims arising from the laws of 48 states. The plaintiffs seek certification of a class of all persons in the United States who, beginning January 1, 1994 through the present purchased a lawnmower containing a two stroke or four stroke gas combustible engine up to 30 horsepower that was manufactured or sold by the defendants. The amended complaint seeks an injunction, unspecified compensatory and punitive damages, treble damages under the RICO Act and attorneys’ fees. In late May 2006, the case was removed to Federal court in the Southern District of Illinois. On August 1, 2006, all of the defendants, except MTD Products Inc., filed motions to dismiss claims in the amended complaint. On August 4, 2006, the plaintiffs filed a motion for preliminary approval of a settlement agreement with MTD Products Inc. and certification of a settlement class. All remaining non-settling defendants have filed counterclaims against MTD Products Inc. for potential contribution amounts and MTD Products Inc. has filed cross claims against the non-settling defendants. A court hearing on the defendants’ motions to dismiss and the plaintiffs’ motion for preliminary approval of the settlement agreement and certification of a settlement class was held on August 29, 2006. The court has not yet ruled on these motions. Also on August 29, 2006, the court held a preliminary class certification hearing and the court has not yet ruled on this matter. Management continues to evaluate this lawsuit and is unable to reasonably estimate the likelihood of loss or the amount or range of potential loss that could result from this litigation. Therefore, no accrual has been established for potential loss in connection with this lawsuit. The company is also unable to assess at this time whether the lawsuit will have a material adverse effect on its annual consolidated operating results or financial condition, although an unfavorable resolution could be material to the company’s consolidated operating results for a particular period.

In the ordinary course of business, in addition to that described above, the company may become liable with respect to pending and threatened litigation for product liability, tax, patent, environmental, and other matters. While the ultimate results of current claims, investigations, and lawsuits involving the company are unknown at this time, management believes that, except for the lawsuit discussed above, the outcomes of these cases are unlikely to have a material adverse effect on the consolidated operating results, liquidity, or financial position of the company.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Nature of Operations

The Toro Company is in the business of designing, manufacturing, and marketing professional turf maintenance equipment and services, turf and micro irrigation systems, landscaping equipment, and residential yard products worldwide. Our products are sold through a network of distributors, dealers, hardware retailers, home centers, mass retailers, and over the Internet, mainly through Internet retailers. Our businesses are organized into two segments: professional and residential. A third segment called “other” consists of domestic distribution companies and corporate activities. Our emphasis is to provide well-built, dependable, and innovative products supported by an extensive service network. A significant portion of our revenues has historically been attributable to new and enhanced products. As we enter the last three months of our “6 + 8” profitability and growth initiative, we expect to continue to invest in growth strategies directed at underserved markets, such as accelerating our growth in international markets. The goals of this initiative are to achieve a consistent after-tax return on net sales of 6 percent or more and grow revenues at an average rate of 8 percent or more over the three-year period ending October 31, 2006.

RESULTS OF OPERATIONS

Overview

Our results for the third quarter of fiscal 2006 were strong with double digit net earnings growth. Our net earnings rose 17.3 percent compared to the third quarter of fiscal 2005; however, the net sales growth rate was a modest 2.3 percent for the third quarter comparison. Year-to-date net earnings rose 16.0 percent in fiscal 2006 compared to the same period last fiscal year on a year-to-date sales growth rate of 4.5 percent. Our sales growth was due to continued strong sales in our professional segment, which was offset by a decline in sales for the residential segment. International sales continued its growth momentum with an increase of 4.9 percent and 13.0 percent for the third quarter and year-to-date period of fiscal 2006, respectively, compared to the same periods last fiscal year. Factoring out the additional sales from our purchase of Hayter Limited, which we acquired in February 2005, total year-to-date international net sales were up 11.6 percent for fiscal 2006 compared to the same period in fiscal 2005. Net earnings as a percentage of net sales rose from 7.4 percent and 7.5 percent in the third quarter and year-to-date period of fiscal 2005, respectively, to 8.4 percent and 8.3 percent in the third quarter and year-to-date period of fiscal 2006, respectively. Higher gross margins, continued leveraging of selling, general, and administrative expenses, and an increase in other income contributed to the earnings improvement. Our financial condition remains strong with a decline in receivables; however inventory levels increased compared to the end of the third quarter of fiscal 2005. We also increased our third quarter cash dividend by 50 percent compared to the quarterly cash dividend paid in the third quarter of fiscal 2005.

Our third quarter sales growth was not as strong as the first half of fiscal 2006. However, we are optimistic that our results for the full fiscal year of 2006 will meet our current expectations, despite an expected negative impact to our fourth quarter net sales growth as we reduce shipments to customers in an attempt to lower field inventory levels, which for certain products were higher than our previous expectations. We continue to keep a cautionary eye on field inventory levels, retail demand, world economies, commodity prices, competitive actions, weather, and other factors identified below under the heading “Forward-Looking Information,” which could cause our actual results to differ from our expectations.

Net Earnings

Net earnings for the third quarter of fiscal 2006 were $40.3 million or $0.91 per diluted share compared to $34.4 million or $0.74 per diluted share for the third quarter of fiscal 2005, a net earnings per diluted share increase of 23.0 percent. Year-to-date net earnings in fiscal 2006 were $124.7 million or $2.78 per diluted share compared to $107.5 million or $2.29 per diluted share last fiscal year, a net earnings per diluted share increase of 21.4 percent. The primary factors contributing to these increases were higher sales volumes, an increase in gross margins, improved leveraging of selling, general, and administrative costs, and higher other income. In addition, third quarter and year-to-date fiscal 2006 net earnings per diluted share were benefited by approximately $0.04 per share and $0.13 per share, respectively, compared to the same periods in fiscal 2005 as a result of reduced shares outstanding due to our significant Toro common stock repurchases.

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The following table summarizes the major operating costs and other income as a percentage of net sales:

Net Sales

Worldwide consolidated net sales for the third quarter and year-to-date period of fiscal 2006 were up 2.3 percent and 4.5 percent, respectively, from the same periods in the prior fiscal year. Factoring out the effect of the additional sales from Hayter, which was acquired in February 2005, net sales for the year-to-date period of fiscal 2006 increased 3.9 percent over the same period last fiscal year. The net sales increase was primarily due to price increases, strong worldwide demand in the professional segment, and the introduction of new products. International sales continued to be strong, particularly in the professional segment, despite the unfavorable impact of currency exchange rates that reduced sales by approximately $0.7 million and $7.5 million for the third quarter and year-to date period of fiscal 2006, respectively, compared to the same periods last fiscal year. Residential segment sales were down due to a decline in shipments of home solutions products, somewhat offset by an increase of new riding product shipments. International residential segment sales were up as a result of strong shipments of snow thrower products in the European market, introduction of new products, and the additional sales from the Hayter acquisition for the year-to-date comparison.

Gross Profit

Gross profit for the third quarter and year-to-date period of fiscal 2006 increased 4.3 percent and 6.2 percent, respectively, compared to the same periods in the prior fiscal year due to increased sales. As a percentage of net sales, gross profit for the third quarter and year-to-date period of fiscal 2006 was 35.6 percent and 35.3 percent, respectively, compared to 35.0 percent and 34.8 percent for the third quarter and year-to-date period of fiscal 2005, respectively. The increase in gross profit as a percentage of net sales was the result of the following factors: (i) price increases introduced on some products; (ii) a higher proportionate share of professional segment sales that carry higher average gross margins than residential segment sales; and (iii) cost reduction efforts, including benefits from past and continuing profit improvement initiatives. Somewhat offsetting those positive factors were: (i) continued higher commodity costs; (ii) lower gross margins for the new line of riding products in the residential segment; and (iii) increased freight costs due to higher fuel costs and increased demand for transportation.

Selling, General, and Administrative Expense

Selling, general, and administrative expense (SG&A) for the third quarter of fiscal 2006 was even at $108.6 million compared to the third quarter of fiscal 2005. SG&A for the year-to-date period of fiscal 2006 increased 3.0 percent from the same period in the prior fiscal year. SG&A as a percentage of net sales for the third quarter and year-to-date period of fiscal 2006 was 22.7 percent and 22.6 percent, respectively, compared to 23.2 percent and 22.9 percent for the third quarter and year-to-date period of fiscal 2005, respectively. The decrease in SG&A as a percentage of net sales was the result of the following factors: (i) a reduction in self-insurance costs due to favorable claims experience and (ii) leveraging the fixed portion of SG&A costs over higher sales volumes. Somewhat offsetting those decreases were: (i) increased investments in engineering and information systems as part of our “6 + 8” initiative and (ii) higher warranty expense due to special provisions for product modifications.

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Interest Expense

Interest expense decreased 3.0 percent for the third quarter of fiscal 2006 and increased by 4.8 percent for the year-to-date period of fiscal 2006 compared to the same respective periods in the prior fiscal year. Higher interest rates increased interest costs, which was somewhat offset by lower average short-term debt.

Other Income, Net

Other income, net for the third quarter and year-to-date period of fiscal 2006 was $2.8 million and $6.1 million, respectively. These amounts represent increases of $2.1 million and $3.4 million, respectively, from the same periods in the prior fiscal year. These increases were due primarily to currency exchange rate gains this year compared to currency exchange rate losses last year, an increase in finance charge revenue, and higher litigation settlement recovery for the year-to-date period in fiscal 2006 compared to the same period in fiscal 2005.

Provision for Income Taxes

The tax rate for the third quarter of fiscal 2006 was 32.6 percent compared to 31.9 percent in the third quarter of fiscal 2005. This increase was due to tax benefits we realized last fiscal year related to foreign export sales. The tax rate for the year-to-date period of fiscal 2006 was 32.4 percent compared to 33.0 percent for the same period in the prior fiscal year. This tax rate decline for the year-to-date comparison was due to favorable resolution of tax matters from prior years’ tax returns.

BUSINESS SEGMENTS

As described previously, we operate in two reportable business segments: professional and residential. A third reportable segment called “other” consists of company-owned domestic distributorships, and corporate activities, including corporate financing activities. Operating earnings for each of our two business segments is defined as earnings from operations plus other income, net. Operating loss for our third “other” segment includes earnings (loss) from operations, corporate activities, including corporate financing activities, other income, net, and interest expense.

The following table summarizes net sales by segment:

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The following table summarizes operating earnings (loss) before income taxes by segment: